Abstract
In practice, the supplier often offers the retailers a trade credit period $$M$$ and the retailer in turn provides a trade credit period $$N$$ to her/his customer to stimulate sales and reduce inventory. From the retailer’s perspective, granting trade credit not only increases sales and revenue but also increases opportunity cost (i.e., the capital opportunity loss during credit period) and default risk (i.e., the percentage that the customer will not be able to pay off his/her debt obligations). Hence, how to determine credit period is increasingly recognized as an important strategy to increase retailer’s profitability. Also, the selling items such as fruits, fresh fishes, gasoline, photographic films, pharmaceuticals and volatile liquids deteriorate continuously due to evaporation, obsolescence and spoilage. In this paper, we propose an economic order quantity model for the retailer where (1) the supplier provides an up-stream trade credit and the retailer also offers a down-stream trade credit, (2) the retailer’s down-stream trade credit to the buyer not only increases sales and revenue but also opportunity cost and default risk, and (3) the selling items are perishable. Under these conditions, we model the retailer’s inventory system as a profit maximization problem to determine the retailer’s optimal replenishment decisions under the supply chain management. We then show that the retailer’s optimal credit period and cycle time not only exist but also are unique. We deduce some previously published results of other researchers as special cases. Finally, we use some numerical examples to illustrate the theoretical results.
Highlights
In the classical economic order quantity (EOQ) inventory model, it was assumed that the retailer must pay for the items immediately after the items are received
The permissible delay in payments produces two benefits to the supplier: (1) it attracts new customers who consider trade credit policy to be a type of price reduction; and (2) it may be applied as an alternative to price discount because it does not provoke competitors to reduce their prices and introduce permanent price reductions
The strategy of granting credit terms adds an additional cost and an additional dimension of default risk to the supplier
Summary
In the classical economic order quantity (EOQ) inventory model, it was assumed that the retailer must pay for the items immediately after the items are received. We propose an EOQ model for the retailer to obtain his/her optimal credit period and cycle time taking into account the following factors: (1) the supplier grants to the retailer an up-stream trade credit of M years while the retailer offers a down-stream trade credit of N years to the buyer, (2) the retailer’s down-stream trade credit to the buyer increases sales and revenue and opportunity cost and default risk, and (3) the selling items are perishable such as fruits, fresh fishes, gasoline and photographic films Under these conditions, we formulate the retailer’s objective functions under different possible cases.
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